Sticks or carrots? Optimal CEO compensation when managers are loss averse


Dittmann, Ingolf ; Maug, Ernst ; Spalt, Oliver


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URL: https://madoc.bib.uni-mannheim.de/2532
URN: urn:nbn:de:bsz:180-madoc-25328
Document Type: Working paper
Year of publication: 2007
The title of a journal, publication series: Rationalitätskonzepte, Entscheidungsverhalten und ökonomische Modellierung
Volume: 07-36
Place of publication: Mannheim
Publication language: English
Institution: Business School > ABWL, Finanzwirtschaft u. Finanzmarktinstitutionen (Spalt 2019-)
Business School > ABWL u. Corporate Finance (Maug)
MADOC publication series: Sonderforschungsbereich 504 > Rationalitätskonzepte, Entscheidungsverhalten und ökonomische Modellierung (Laufzeit 1997 - 2008)
Subject: 330 Economics
Classification: JEL: M52 G30 ,
Subject headings (SWD): USA , Aktienoption , Anreizsystem , Kapitalertrag , Risikoverhalten , Führungskraft , Schätzung
Keywords (English): Stock Options , Executive Compensation , Loss Aversion
Abstract: This paper analyzes optimal executive compensation contracts when managers are loss averse. We calibrate a stylized principal-agent model to the observed contracts of 595 CEOs and show that this model can explain observed option holdings and high base salaries remarkably well for a range of parameterizations. We also derive and calibrate the general shape of the optimal contract that is increasing and convex for medium and high outcomes and drops discontinuously to the lowest possible payout for low outcomes. We identify the critical features of the loss-aversion model that render optimal contracts convex.

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Dittmann, Ingolf ; Maug, Ernst ; Spalt, Oliver (2007) Sticks or carrots? Optimal CEO compensation when managers are loss averse. Open Access Rationalitätskonzepte, Entscheidungsverhalten und ökonomische Modellierung Mannheim 07-36 [Working paper]
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